India is the best bet in emerging markets: analyst
It’s a tough time to be invested in emerging markets, and headlinegrabbing developments such as a corruption scandal in Brazil, the oil- induced recession in Russia and China’s roller- coaster equity market don’t make it any easier.
Nobody has forgotten about the attractive growth opportunities on offer, but the appetite for exposure to developing economies is unlikely to improve until the global market shows sustainable signs of improvement.
Emerging- market stocks are down almost 20 per cent in the past three months alone, but there appears to be one bright spot: India.
“Everybody is obsessed about China, but we’re very interested in India, and have been for a while,” said Laurence Bensafi, deputy head of emerging markets equities at RBC Global Asset Management. “It’s pretty much the only good story around, even though it is going to take a bit more time.”
India’s stocks rallied last year on Narendra Modi’s national election victory, but have since sold off as investors haven’t seen the changes they were counting on. But, as Bensafi points out, India’s huge size means growth projects don’t surface overnight.
“In China, when the central government decides something, they just do it,” she said. “India is different because local governments have way more importance.”
Bureaucracy and corruption are major challenges for India, and the country is also very diverse, with different languages, religions and cultures represented in various regions. These are some of the reasons Bensafi thinks it could take five years or so for significant changes to surface.
But the broad underinvestment in India is where the real opportunity lies, despite the lengthy timelines associated with building and financing infrastructure.
“We tend to group India and China together, but China is really 20 years ahead in terms of things like GDP per capita and infrastructure,” the London- based portfolio manager said during a recent visit to Toronto. “So much has been built in China over the past 10 years, but India is really far behind.”
All the portfolios Bensafi helps manage, including the RBC Emerging Markets Equity Fund and the RBC Emerging Markets SmallCap Equity Fund, are overweight India. Many of the most attractive market segments are related to the consumer since about one billion people are moving into the middle class in emerging markets.
The largest position in the core equity fund is Housing Development Finance Corp. Ltd., India’s leading mortgage company, which is growing at 20 per cent annually. Bensafi noted the company’s potential is even greater given that India’s mortgage market is starting from a very low base.
Her portfolios also have exposure to areas such as the tire sector, where demand is increasing while rubber prices are decreasing.
Only a few years ago, emergingmarket stocks were highly correlated to commodity prices, and many investors still think that’s true. But Bensafi noted that the majority of emerging markets are now positively affected by lower commodity prices, since the percentage of energy and materials stocks in the MSCI Emerging Markets Index is only about 10 per cent.
“The correlation has collapsed,” she said, noting that the weighting of commodity countries such as Russia and Malaysia has also dipped to about 20 per cent. “India is a big winner from the drop in commodities because they are a large importer of them, along with countries like Turkey, Taiwan and ( South) Korea.”
One positive development linked to lower commodity prices is more muted inflation. A lot of countries have also been able to cut subsidies, as international prices for things such as energy had been too expensive for citizens in poorer nations.
“Billions and billions that was spent but didn’t create value can now be put toward interesting projects,” Bensafi said.
As for the recent turmoil in China’s equity market, the portfolio manager reminds investors that the wealth effect there is nothing like it is in North America.
Whereas roughly half of Americans’ wealth is in the stock market due to pension plans and investment accounts, only about five per cent of Chinese wealth is in the stock market, and just 10 per cent of the population invests in stocks.
“What’s important for people in China is the property market,” the portfolio manager said, adding it is doing much better despite her overall caution about stocks there.
Excessive inventory levels are dwindling in Tier 1 cities, leading to price increases and heightened demand, but even Tier 2 and Tier 3 cities are generally healthy, and that’s good news for the entire Chinese economy.